Macroeconomic and financial market commentary

It’s a mad, mad world.

Insanity in individuals is something rare — but in groups, parties, nations, and epochs it is the rule.
Friedrich Nietzsche

John Lennon famously once said that life is what happens while you are busy making other plans. That was good advice for sure, and his own death is a clear example. We do not know how long we are going to last, and must avoid reproducing the pattern. The best lesson of history, is that we human beings fail to remember the very same lessons of history. We’ll try otherwise, but I am not optimistic.

Paraphrasing the maestro, if you think you understood what I am saying, you could be wrong. Nowadays I am not sure of anything, except debt unsustainability. I often conclude I end up twisting and turning all arguments when theorizing on the economy or life -just like a central banker. I worry I am so obsessed with Central bankers, that I am even changing my personality tics. ¡I sound like Greenspan! I promise it hasn’t been like this all the time. When I was young, I fantasized with beautiful women just like nearly every other male. More thinking, and less sex, is the way you ensure you become at least as old as your birthday date can attest.

In my particular case, I have to be particularly watchful about allocating a disproportionate amount of time to the most prescient analysis I can reasonably achieve, and forget to live in the meantime. Drinking, singing or sailing (and all other “ing'” that are sinful or enjoyable) are more important than the dissection of the malfunctions of our economic system.

In this line o thought, I was actually thinking of rounding up the current state of affairs in the global village. After reading Roubini’s last post at Marketwatch, I decided to leave the update for a later time. We all seem to keep on talking about the same things, with a monotonous result. My wife says so, and she is always, by definition, correct.

The last fad is finding new superlatives for the last series of desperate efforts by brainless politicians to balance the boat. Like critizising predictably predictable Jean Claude Juncker, and his latest insane, no money, more debt, free lunch, investment plan. Or underscoring the fact that Kuroda et al are increasingly out of their minds. But it can also be about Christine Lagarde’s or Summer’s new terminologies for El Erian’s “new normal” (rebaptized as secular stagnation or whatever).

Theorizing on the different possible mixes of monetary and fiscal policies tops the list. As of late, we have found a brand new reason why macro policies implemented in the OECD over the last couple of years got it wrong. Not only do we need to increase the dose, but we have to change the policy mix. I think the closing paragraph in Roubini’s latest article in Marketwatch sums it all up. That’s it, the cocktail was long of gin and too short of tonic and lemon.

“The right policies — less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing — are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.”

For once (I will try not to make a habit out of this), I quite disagree with Nouriel. We can discuss all night what came first, the chicken or the egg. By the way, I stand for the latter. But we will miss the point. The problem is not the keynesian mix, but the keynesian approach in itself.

Not running and advisory business myself (nobody pays me for writing this), I am able to say that out loud, with no risk of losing money because of my verbal incontinence. Today, It doesn’t pay to disclose you are not a Keynesian. Very much like a celebrity coming out of the closet, or admitting to being HIV positive, your PR department is going to be very upset. I have none of them in my staff, so I can safely say whatever I feel like, provided I do not exceed some inevitable sarcasm on the figure of our gracious Queen (the Spanish one). I value my intelectual liberty only second to my racing sailboat. And of course the zero benchmark, even before my boat, is devoted my beloved wife (she reads this on occasions).

Does Roubini really believe growth is disappointing mostly because the policy mix was not entirely adequate? Come on Nouriel, I am sure you know better than that. We should all be aware of the contagion effects of the krugman virus. Thought transmission has allowed it to become epidemic. In the final stages you can only pronounce the words “print” and “spend” (in different mixes). Given the choice, I’d settle for Alzheimer’s Disease.

According to recent figures provided by Ravi Menon (Singapore central banker), debt to GDP on a global basis (excluding the financial sector) has grown by some 38% since the advent of the GFC in 2008. We are now at -long drum roll- 212% of global GDP! Do you care for more aphrodisiac keynesian policy cocktails?

I wonder why we are all averse to zero growth and zero inflation, and instead embrace zero interest rates and growing debt as a panacea. In Europe, as I write this, people are salivating like Pavlovs dog on the presumed Dragui QE. I must belong to another planet, because I would enlist for the alternative, above mentioned, double zero option. Not that I like zero for most things in life, but I am fed up with krugmanite binary thinking.

With Roubini advocating more keynesian stimulus (¡oh yes, with a different mix!), it suddenly feels lonely in the Austrian club. Pretty women all left to live with the smart Keynesians long ago. I feel repudiated, but have to live with this. And I have to invest in order to be able to sustain my live style, and enjoy all those sinful “ing” of life. Meaning, we have to decide where we go from here (financially speaking). I’m afraid that the way things are priced in the financial markets (as I write), I have to resort (more than ever) to that old and wise proverb:

“When investing, the amount of return you want should depend on whether you want to eat well or sleep well.”

At my age, I clearly need to sleep better and eat less. So I am nearly all cash, nearly zero risk (zero risk is unattainable), in my investment portfolio. After a few years of ZIRP and NIRP, I can assure you I am nearly zero overweight (I always end up with a kinda zero argument). I will ask Krugman to suggest some variation on banana split desserts to alleviate such desperate condition.

If you want to evaluate what the future may bring, there is certain variables you have to scrutinize. Because we humans have become a powerful element on the face of earth, probably our conduct should be appraised first. I think Nietzsche explained it clearly. The human race lives epochs of intense insanity. Put me on the list of those who think this is one of them.

What our desperate central bankers will do next can be inferred, even if they are desperate, because they are nearly all sailing their laylines. But when it comes to politicians, and the crowd that votes them, all bets are off. Crowd behaviour is a lot more frightening to me, than the perfect storm when sailing the Atlantic.

Not an encouraging starting point I know, but don’t quit. Please keep reading, because we have to move on. We might as well guesstimate what to do with our wealth and that of the people we love, than accept the inevitable with no thinking. Before the great leveraging (a very self rewarding “ing” for most), economic growth used to be a function of two variables: employed population growth, and productivity growth. That was then, and now is now. Things have become more complex (except for krugmanites whith binary printing-or-spending thinking).

Four new relevant factors have come to play:

1.-Leveraging or deleveraging cycles. Aggregate demand is not equal to the sum of payments to land, labour, and capital in the productive process, but to the sum of all those amounts plus the net leveraging incurred by society, and enabled by fractional reserve banking, or outright money base expansion. We have witnessed the mother of all leveraging periods in humanity. What comes next is not difficult to see. We do not know when Central Bank shamans will allow it to happen, but deleveraging will be the name of the game for some time to come. Aggregate demand will remain the most relevant macro magnitude to protect in the foreseable future. We have simply pre-spent it. See for yourself. Do you think it’s about spending more?

2.- Finite resources such as energy, land, phosphates, or water, to emphasize a few. And we not only have to evaluate what’s left to use, but have to figure in the influence of factors (like climate change) that can alter the efficient use of some of them. Eg. If the rain cycle is seriously affected, agricultural outputs might be subject to serious headwinds.

It’s been a long time since Malthus. We never thought this might be the case, butthe reality we are facing is that energy and overpopulation constraints are probably an apprehension of the past. Other elements have grown to a substantially worse prognosis. Cheap energy (solar, wind or nuclear) is one of the bright factors ahead. And it is a very important one. Distributed energy generation is the main characteristic of future energy grids. Utilities should be thinking of adapting fast, instead of lobbying to delay the inevitable.

Other finite resources increasingly demand our attention, but should not be a devastating obstacle to economic growth and human well-being. We have to be mindful of the concept of limited resources, but they are not my main worry for the next couple of years.

3.- Bloated unproductive sectors. A job is a job, and they all deserve the presumption of “productive”. Some do not live up to that criterion. Politicians of all levels, international institution members, and excessive national or local civil servants can seriously undermine the value added by our active labour force. It is not only about increasing the statistics of the employed, but also about increasing their number in the productivity related areas of the economy. What you pay a politician or a biologist is all a part of GDP, but it is obviously preferable to employ a lot more biologists than politicians.

I do not think full employment is a relevant data input. In an eventual situation were only 55% of the population could be counted as active labour, and 25% of that number was employed in public semiproductive sectors, it would be an awful undeprpinning for a socially or economically healthy society. We have to put our institutional an political system on a diet, if we want to allow productivity growth to spread, and not remain a factor of just a few productive sectors. It is the weighted average productivity growth that counts. When you hire an additional civil servant you create the illusion of jobs. What you are in fact doing is generating additional overhead for the good jobs to survive.

4.- Never mind bloated unproductive public sectors. That’s peanuts. The sheer weight of the welfare state is killing our productive infrastructure. See for yourself once again.

If somebody was about to cross the Sahara dessert on foot, in the past, one could gauge the chances of success in view of the expected temperature, distance to walk, and fitness of the individual.

The weight of his backpack was normally not a relevant factor, because everybody walked with the essential water and food to be carried. Now we all have a backpack overburdened with welfare. Mind you, I am not saying a welfare state has no right to exist. All I do is stress the fact that the extra weight has become very relevant indeed. If you are Chinese and have to cross the dessert, you have to cater mostly for yourself. If you are remarkably fit, and stronger, but European, you have to carry the necessary water for you, two or three corrupt politicians, and 50% of the needs of one retired individual (one retiree every two workers). Now, that makes a difference! When betting, a skew in favor of the Chinese participant in the trip, is likely to come to light in the pricing model.

It is also a lost cause to try to improve the fitness of the individuals crossing the dessert, if we keep loading them up with weighty backpacks.

Solidarity is needed, but the survival of the individual doing the job is also to be considered.

Specifically it worries me that when the economic reality deteriorates, welfare does not remain constant as a percentage of GDP, but increases markedly, increasing the burden on the productive units trying to weather the storm. This is clearly counterproductive.

Solidarity and welfare have to be, economically speaking, a relative concept. I am cognizant of the fact that It is an unfortunate economic reality that does not fit nicely with ethics and religion. Spain cannot afford 26,8% of GDP of social expenditure. Even with lower debt levels. Uncomfortable as it may be, that is a sure thing. Explaining this to the crowd, is now all that is needed. We ought to get the perfect storyteller -maybe Juncker? I wish you the best with that, Jean Claude.

And then we have the two traditional factors of economic growth. Productivity and population growth. Whilethere is some debate on productivity expectations,I am very positive on the issue. Robotics, communications, software, genomics, 3D printing, and biotech will vastly improve our economic output and longevity. I do not think productivity growth has stalled. Provided we do not dilute those improvements in a pool of a 1% yearly growth of public servants, priests, politicians, military, and assimilated. They do work, it’s not their fault, and they can be better at it than a private sector worker. But we clearly have an excess of them.

Population growth as an economic factor, will be on the whole, mediocre. It will redistribute growth though, helping countries like India (I think India offers a good investment outlook relative to the rest), and further downgrading Europe’s probabilities for survival (in its present form). But I do not think it low population growth is a problem, because it shouldn’t be all about GDP growth, but about individual improvement in the standard of living. The only reason we need to grow GDP, is the amount of floating debt accumulated in the leveraging cycle. Funny, we all seem to live to service debt. With no substantial debt load, growth should be a relative target (not absolute target), and only on a “per capita basis”.

Working age population growth is another issue altogether. Houston, we have a problem here. Longevity is a double edged sword. Welfare cannot grow indefinitely. So if we are more to live in retirement, there has to be less money per retiree. Welfare has to be indexed to GDP. If people have to work for longer, that’s the way it is. Thankfully I am not planning a visit to France. Their labor unions would kill you for something a lot more inconsequential. They invented popular witch burning with Joan of Arc. We Austrians are next.

Soif we want to weigh in all the previous considerations, the outlook is not all that bad, provided we can do a couple of seemingly impossible things:

Dispose of accumulated debt without a global war. We have to deflate balance sheets substantially, one way or another, sooner or later. We will not grow ourselves out of debt. Zero is the the coolest word in actual economics. For some it is better to take zero rates, others would accept zero growth and no debt.

Reduce entitlements in some places (Europe) and, above all, refer their global amount to a percentage of GDP,so that they do not grow in relative terms, with every downturn in the economy. So much for the Keynesian “natural stabilizers”. We need economic cycles like we need sleep. The “great moderation” and “cycle free economy” Princeton concepts are preposterous. What we do not need is accumulated gruesome debt. We should get rid of the abused stabilizers and their Princeton custodians asap.

Lighten up substantially on institutional, state, local apparatus everywhere. We have to relocate people to real bread-making jobs. We do not need the industrial confederations, labor unions, states, regions, and most of the actual international institutions. We need to produce more bread and wine, and less smoke and mirrors. We need more real output, and less financial, public or consulting services.

Reduce size of multinationals and governments, and enable a level playing field so that individuals can bargain for a fair share of output, reducing inequality when it is generated. The only way to distribute wealth efficiently is preventing inequality; subsidizing the poor only buys us time. We should steer clear of costly, inefficient, prone to corruption, redistribution of wealth. We have to work on the roots of inequality, not its effects. I am both against inequality and progressive taxes. Subsidies should only be a desperate remedy when everything else fails.

Thank God, educated people that get the appropiate vaccine, have a fair chance of remaining free of “crowd insanity”. I plan to do so, and bolster this determination daily (particularly whenever watching the news on TV). The whole world is mad, and things are getting worse, not better.

Do not believe a word of what politicians tell you. Keep your money safe, because it ain’t over till it’s over.

And it isn’t over. The massive, ludicrous debt overhang is still there, looming like an enormous, nuclear, mushroom shaped, cumulonimbus.

We live underneath. While we wait for radioactivity to come down, we might as well enjoy the dolce vitain Paris. Give me a call for that.